Why Jardine is unlikely to pull the plug
COMMENT: "It is quite something when one of the once great names of British industry becomes nothing more than a penny stock punt for he spivvier end of the stock market"
Friday 20 October 1995
It is no surprise that cocktail party gossip in the colony's dying days is all about the Keswicks' latest disaster, the collapse of Jardine Matheson's escape tunnel from the Chinese authorities that the so-called Noble House has always failed to appease. There are few places where loss of face stings so harshly.
What is most remarkable is the way that, so far, Henry and Simon Keswick have survived the loss to Jardine's shareholders of so much of their investment in Trafs. Maybe the bargain hunters that swept the shares off their lows yesterday are right to gamble that the brothers would never dare to crystallise the loss of the pounds 300m they have poured in to the sinking conglomerate since 1992. In the context of a giant trading empire such as Jardine, pounds 300m may not be life-threatening but it is the sort of fouled-up investment that would rightly be the end of many a chief executive
Clinging on and hoping for the best is unlikely to be a realistic option for Hongkong Land, the subsidiary through which Jardine took the ill- conceived stake. If Trafs is to survive its current deep-seated problems it must pare down to its contracting and engineering core, selling off Cunard and Ideal, the housebuilder, and inject enough new cash to convince customers the company has a viable future. Jardine must risk throwing good money after bad.
If Trafs were a manufacturing business, the strength of its product might be enough to pull it through. But in engineering and contracting, confidence is all - customers will simply not consider placing orders with a company under a cloud as large and dark as that hanging over Trafalgar.
The other reason Jardine will probably avoid pulling the plug is the doubt doing so would cast on the company's whole strategy. It has got things wrong before, investing in UK property just before the 1970s collapse, for example, but with the imminent arrival of the Chinese in Hong Kong the stakes are immeasurably higher this time round. Not that Hongkong Land's continued support necessarily makes Trafs' battered shares any more attractive. Only when the full extent of the damage to the company's balance sheet is revealed in December will anything but the utmost caution be appropriate.
Thorn music sweeter than CBI presidency
The Confederation of British Industry is still an important and influential organisation but Sir Colin Southgate, chairman of Thorn EMI, can hardly be blamed for turning down its presidency. Over the next year or two, he is going to have his work more than cut out. Thorn EMI may not yet be in play, but it is pretty close to it. If Sir Colin decides to push ahead with plans to demerge the company's music and TV rental businesses, then it certainly will be. The music side, with its galaxy of stars and copyright, is one of the three biggest record labels in the world and the only one that it is even remotely possible to buy. As the multi-media revolution gathers pace, it becomes increasingly attractive.
Plainly it makes strategic sense to demerge the TV rental business, which is about as relevant to music as a ten-bob note. From a shareholder value point of view, it also makes commercial sense. TV rental and music as separately quoted companies would almost certainly be worth more than the two companies combined. But from the point of view of keeping the core music business independent and British - which Sir Colin is keen to do - it may make no sense at all. Once stripped of TV rental, the music side becomes even more easy to purchase. There's the conundrum.
And if the purpose of all this is only one of maximising shareholder value, there may be better ways of doing it. One method would be to put the music side up for sale (likely price pounds 5bn plus) and make it subject to a trade auction. Certainly Thorn EMI has already had approaches along these lines. The proceeds could then be handed back to shareholders by way of special dividend, allowing gross funds to claim a thumping great tax credit on top.
There is, however, one way in which the trick of both demerging and remaining independent might be accomplished. This would be to accompany the demerger with the acquisition by the music side of a more appropriate business - say in publishing. If that is what Sir Colin has in mind, it is no wonder he hasn't got time for the CBI.
Clarke wrestles with housing conundrum
Kenneth Clarke today meets with his Treasury team at the country getaway of Dorneywood with fresh calls for action to help the housing market ringing in his ears.
At first blush, the latest dispatch from the battlefront of Arcadia Avenue could hardly be gloomier. Cornerstone, the rump of what was once the country's largest privately owned estate agency chain, went bust yesterday. Meanwhile, building societies said that their net lending had fallen by one-fifth in September. Banks also reported a decline in their mortgage lending - this in the last month before the new mortgage insurance provisions came into effect.
All powerful ammunition for the societies in their lobbying for help in the Budget. The favoured tax break is now the removal of stamp duty, which at around pounds 500m on residential property would at at least have the merit of not costing an arm and a leg. But even if the Chancellor were not in the tight fiscal corner that he finds himself, he might think twice before granting the building societies their wish. There are signs that the housing market may already be recovering from this year's renewed slump.
Earlier this month, the Bank of England published figures showing a big jump in the number of loans approved in August by banks and building societies. In fact they reached their highest level so far this year. We now know that building societies increased their loan approvals in September, too.
Not all loan approvals translate into actual purchases, but they at least indicate whether people are seriously looking for houses. In a few days' time we'll know whether banks also stepped up their loan approvals in September. If this is so, it would show that August was not just a freak month and that the housing market might be poised for revival.
With so little money to spare, Kenneth Clarke is likely to cross his fingers and hope that the housing market is set to recover of its own accord. If he gets it wrong, he won't be the first Chancellor to be misled by the green shoots of recovery.
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